When I hear people talking about bankruptcy, one of the common questions that come up is people wanting to know how to overcome bankruptcy.
My short answer is to just breathe and take things one day at a time. Honestly, if you are in a situation where bankruptcy is your best option (and sometimes it is), then after you file and go through the process of having your debts discharged (Chapter 7), you will have a clean slate to start fresh and room to breathe. Yes, you will have higher interest rates until some time passes and you are able to re-establish your credit, but this will likely happen sooner than you think.
To find out more specific legal advice, search for attorneys in your local area, that can help with your specific financial situation. There are many exemptions from bankruptcy, so it’s a good idea to talk to a professional before you take any action. Initial consultations are often free and your attorney will be there to listen and help you to resolve your difficult financial situation.
For people in serious financial trouble, it can actually help their credit to file for bankruptcy. It stops the collections, erases the debt (depending on the chapter) and helps you to make a fresh start.
I personally know a couple who bought a car 6 months later, and home 18 months after their bankruptcy was discharged. Sure the rate was higher, so they had to lower the purchase price to be able to afford the payments, but without the bankruptcy, they would not have qualified for any loans.
The hardest part of filing bankruptcy for most people is the embarrassment and fear of judgment by people they know. The truth is that most people won’t know unless you tell them. The only way they’d find out is if they happen to see the tiny snippet in your local paper, or if they are searching your public records. If they are doing those searches just to be nosy, you can’t really stop that, but honestly, that says a lot about their own character in my opinion.
Financially, here are some practical steps that will help you get back on your feet
1. Set up a budget
List all of your income and expenses. This sounds like a basic advice, but it is the foundation of getting back on your feet. Make sure that you include all money coming in and all regular utility bills and projected expenses. You will probably need to trim the expenses down to the bare minimum, but for now list everything you have going out.
2. Account for every dollar you spend
Remember you are trying to establish a firm foundation, so during this time it’s important to spend on needs, not wants. I know that sounds harsh, but it will get easier as your finances get better. Writing everything down will make you more accountable (to yourself and your family) and you are less likely to spend money on things you don’t need.
3. Make sure your expenses DO NOT exceed your income
As part of your bankruptcy, most, if not all, of your unsecured debt should be erased, leaving you with only secured debt. Typically, they have you restructure those loans with the lenders, to make sure you can afford your payments. So, if your expenses are still too close to exceeding your income, you may need to eliminate some and go without non-essentials, such as cable television, magazine subscriptions or clothes.
4. Set up a savings account
We’ve had our share of financial issues. What got us through them for quite a while was our savings account. From the time I started working at 16, I started saving a minimum of 10% of my paychecks. I continued on with that as an adult, and when we had job losses, we relied on that money for food, rent, and basic utilities.
Save as much as possible until you have at least 6 months worth of your income in a liquid savings account. It will be hard, but if a time comes that you need it, you will be thankful it is there!
5. Establish goals
Plan ahead for any major purchases and holidays, etc. If you know you will need a new set of car wheel tires in 6 months and they cost $600, find a way to save $100 per month. It is so nice to be able to pay cash for things. Not to mention, if you can’t afford $100 a month now, how are you going to afford a $600 hit in 6 months?
6. Try to avoid credit cards and other unsecured debt
The offers will probably start coming in right away. They know you can’t file again for a very long time, so they are eager to offer you credit. This will probably be shocking since before you filed, they never would have considered you. If you decide to get one for emergencies.
Leave the credit card for emergencies, and that is not your morning coffee or a lunchtime sandwich! If anything, set up one bill (insurance, etc) that you can pay via credit card that you’d have to pay in full anyway. Let them put it on your card, and then pay the card company instead of the original billing company. You’re still paying the bill (make sure you pay in full to avoid interest, etc!), it will keep the card active and show you are using it and paying it on time (pay on time!), yet it won’t raise your debt to income ratio because you aren’t carrying a balance.
7. Learn to check your credit report
You can get free copies once per year, from each credit reporting agency. I advise getting one every 4 months, if you can, but alternate the credit reporting agency. Check for errors and make sure things discharged are reported that way. If you need to dispute something, do it right away. Getting reports periodically helps keep you informed of any inaccuracies and will keep you motivated to stay on the right financial path as you see your credit score improvement over time.